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Still opportunities in Asian equities, says OMGI’s Crabb

24 March 2017

OMGI’s head of Asian equities explains why valuations remain at attractive levels and what the year ahead holds for the region.

By Rob Langston,

News editor, FE Trustnet

Investors who remain underweight in Asian equities may be missing out on some attractive valuations in the region as developed markets continue to offer little upside, says Old Mutual Global Investors manager Joshua Crabb.

A recent fund manager survey by Bank of America Merrill Lynch revealed that managers thought emerging markets were the most undervalued region, yet they remain close to neutral positions. [LINK]

“A lot of people are underweight [Asian equities]. They don’t want to be but they are waiting to buy,” explained Crabb.

With the US market trading at higher levels since the election of Donald Trump as president, however, investors are beginning to hunt around for opportunities.

Indeed, Crabb notes that flows into Asia ex-Japan funds have fallen in recent years while valuations remain at low levels based on price/book (P/B) ratios.

Crabb says the MSCI Asia ex Japan index is currently trading at 1.6x price/book, compared with 3.1x for the S&P 500 index, at a near high over the past 13 years.

At the moment, the markets seem well positioned for a rally relative to the MSCI World index, says Crabb, with more room for growth.

Concerns over the impact of a strengthening US dollar on Asian equities may also have been overdone.

While the dollar is currently trading at heightened levels, there remains room for action by the Federal Reserve to increase the Fed funds rate, which could drive the greenback lower, if past cycles are anything to go by, says Crabb.

The Fed raised rates by 25 basis points earlier in March and a further 2-3 increases are anticipated before the end of the year.

Coupled with higher earnings growth for Asian companies anticipated by markets this year, Crabb says this could contribute to solid returns in 2017.

A more optimistic outlook for global growth this year has helped drive markets higher, however, concerns have been raised over Chinese growth. GDP growth is expected to fall to 6.5 per cent in 2017, down from 6.7 per cent in 2016, according to data from the Organisation for Economic Co-operation and Development.


As the biggest economy in the region, Chinese equities form a major part of Crabb’s portfolio.

Concerns over the growing size of public debt have also been raised. However, Crabb remains more positive.

“People see Chinese debt as an issue, but the whole world has [the same] issue and at some point that needs to be sorted out,” he said. “I don’t think it is an issue.”

The manager says Chinese government debt – which has been estimated at around 40 per cent of GDP or more than $4trn – does not operate in the same way as other developed nations, with the central government shouldering more of the burden than regional government borrowers.

Equally increasing levels of household debt is not an issue for the economy given traditional high savings rates in the country.

The Old Mutual Pacific Equity fund was up by 31.8 per cent in 2016, after making a loss of 7.4 per cent in 2015. In 2017, so far, the fund is up by 12.7 per cent in 2017 compared with an 11.02 per cent gain in the MSCI AC Asia Pacific ex Japan index.

Performance of fund vs sector & benchmark over 1yr

 
Source: FE Analytics

The contrarian fund manager’s approach has paid off and current market conditions have driven returns for genuinely active managers.

Over the past 12-18 months, the manager says the strategy has made money from previously unloved areas such as industrials and materials that helped the fund outperform in 2016.

Crabb notes the level of dispersion in markets has also contributed to greater opportunities for growth over the past year.

“You should buy low and sell high, but what people do is buy high and sell low,” he said.


Another fund overseen by Crabb is the Old Mutual Asian Equity Income, which has risen by 12.7 per cent in 2017 following a 31.8 per cent gain in 2016.

Performance of fund vs sector & benchmark in 2016

 
Source: FE Analytics

Here too, the contrarian approach has paid off. Crabb says the fund has been unafraid to invest in areas of the market less popular with other investors over the past year.

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Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.